Competing in

Foreign Markets

“You have no choice but to

operate in a world shaped

by globalization and

information revolution.

There are two options:

Adapt or die.”

Andrew S. Grove

Presentation Roadmap

Why Companies Expand into Foreign Markets

Cross-Country Differences in Cultural, Demographic, and

Market Conditions

The Concepts of Multi-country Competition and Global

Competition

Strategy Options for Entering and Competing in Foreign

Markets

The Quest for Competitive Advantage in Foreign Markets

Profit Sanctuaries, Cross-Market Subsidization, and Global

Strategic Offensives

Strategic Alliances and Joint Ventures with Foreign Partners

Competing in Emerging Foreign Markets

The Four Big Strategic Issues in Competing Multinationally

Whether to customize a company’s offerings in each different

country market to match preferences of local buyers or offer a

mostly standardized product worldwide

Whether to employ essentially the same

basic competitive strategy in all countries

or modify the strategy country by country

Where to locate a company’s production facilities,

distribution centers, and customer service operations

to realize the greatest locational advantages

Whether and how to efficiently transfer a

company’s resource strengths and capabilities from

one country to another to secure competitive advantage

What Is the Motivation for Competing Internationally?

Gain access to

new customers

Capitalize on core

competencies

Help

achieve

lower costs Spread

business risk across wider market base

Obtain access to

valuable natural

resources

International vs. Global Competition

International

Competitor

Global

Competitor

Company operates in a select

few foreign countries, with

modest ambitions to expand

further

Company markets products in

50 to 100 countries and is

expanding operations into

additional country markets

annually

Cross-Country Differences in Cultural,

Demographic, and Market Conditions

Cultures and lifestyles differ among countries

Differences in market demographics

Variations in manufacturing

and distribution costs

Fluctuating exchange rates

Differences in host government

economic and political demands

How Markets Differ from Country to Country

Consumer tastes and preferences

Consumer buying habits

Market size and growth potential

Distribution channels

Driving forces

Competitive pressures

One of the biggest concerns of companies competing in foreign

markets is whether to customize their product offerings in each

different country market to match the tastes and preferences of local

buyers or whether to offer a mostly standardized product worldwide.

Different Countries Have

Different Locational Appeal

Manufacturing costs vary from country to

country based on

Wage rates

Worker productivity

Natural resource availability

Inflation rates

Energy costs

Tax rates

Quality of the business environment varies from country to country

Suppliers, trade associations, and makers of complementary products

often find it advantageous to cluster their operations in the same

general location

Fluctuating Exchange Rates Affect

a Company’s Competitiveness

Currency exchange rates are unpredictable

Competitiveness of a company’s operations

partly depends on whether exchange rate

changes affect costs favorably or unfavorably

Lessons of fluctuating exchange rates

Exporters always gain in competitiveness

when the currency of the country where

goods are manufactured grows weaker

Exporters are disadvantaged when

the currency of the country where

goods are manufactured grows stronger

Differences in Host Government Trade Policies

Local content requirements

Restrictions on exports

Regulations on prices of imports

Import tariffs or quotas

Other regulations

Technical standards

Product certification

Prior approval of capital spending projects

Withdrawal of funds from country

Ownership (minority or majority) by local citizens

Multi-country

Competition

Global

Competition

Two Primary Patterns of International Competition

Characteristics of Multi-Country Competition

Market contest among rivals in one country not closely

connected to market contests in other countries

Buyers in different countries are

attracted to different product attributes

Sellers vary from country to country

Industry conditions and competitive forces in

each national market differ in important respects

Rival firms battle for national championships –

winning in one country does not necessarily signal the

ability to fare well in other countries!

Characteristics of Global Competition

Competitive conditions across

country markets are strongly linked

Many of same rivals compete in

many of the same country markets

A true international market exists

A firm’s competitive position in one country is affected

by its position in other countries

Competitive advantage is based on a firm’s world-wide

operations and overall global standing

Rival firms in globally competitive industries

vie for worldwide leadership!

Strategy Options for Competing in Foreign Markets

Exporting

Licensing

Franchising strategy

Multi-country strategy

Global strategy

Strategic alliances or joint ventures

Export Strategies

Involve using domestic plants as a production base for

exporting to foreign markets

Excellent initial strategy to pursue international sales

Advantages

Conservative way to test international waters

Minimizes both risk and capital requirements

Minimizes direct investments in foreign countries

An export strategy is vulnerable when

Manufacturing costs in home country are higher

than in foreign countries where rivals have plants

High shipping costs are involved

Adverse fluctuations in currency exchange rates

Licensing Strategies

Licensing makes sense when a firm

Has valuable technical know-how or a patented product

but does not have international capabilities to enter foreign

markets

Desires to avoid risks of committing resources to markets

which are

Unfamiliar

Politically volatile

Economically unstable

Disadvantage

Risk of providing valuable technical know-how to foreign

firms and losing some control over its use

Franchising Strategies

Often is better suited to global expansion efforts

of service and retailing enterprises

Advantages

Franchisee bears most of costs and

risks of establishing foreign locations

Franchisor has to expend only the

resources to recruit, train, and support franchisees

Disadvantage

Maintaining cross-country quality control

Multi-Country Strategy

Strategy is matched to local market needs

Different country strategies are called for when

Significant country-to-country differences in customers’

needs exist

Buyers in one country want a product different

from buyers in another country

Host government regulations preclude

uniform global approach

Two drawbacks

1. Poses problems of transferring

competencies across borders

2. Works against building a unified competitive advantage

Global Strategy

Strategy for competing is similar in all country markets

Involves

Coordinating strategic moves globally

Selling in many, if not all, nations where a significant

market exists

Works best when products

and buyer requirements are

similar from country to country

Fig: How a Multicountry Strategy Differs from a Global Strategy

The Quest for Competitive Advantage in Foreign Markets

Three ways to gain competitive advantage

1. Locating activities among nations in ways that lower

costs or achieve greater product differentiation

2. Efficient/effective transfer of competitively

valuable competencies and capabilities from

company operations in one country to

company operations in another country

3. Coordinating dispersed activities in

ways a domestic-only competitor cannot

Locating Activities to Build a Global Competitive Advantage

Two issues

Whether to

Concentrate each activity in a

few countries or

Disperse activities to many

different nations

Where to locate activities

Which country is best

location for which activity?

Concentrating Activities to Build a

Global Competitive Advantage

Activities should be concentrated when

Costs of manufacturing or other value chain activities are

meaningfully lower in certain locations than in others

There are sizable scale economies

in performing the activity

There is a steep learning curve associated

with performing an activity in a single location

Certain locations have

Superior resources

Allow better coordination of related activities or

Offer other valuable advantages

Dispersing Activities to Build a

Global Competitive Advantage

Activities should be dispersed when

They need to be performed close to buyers

Transportation costs, scale diseconomies, or

trade barriers make centralization expensive

Buffers for fluctuating exchange rates, supply

interruptions, and adverse politics are needed

Transferring Valuable Competencies to

Build a Global Competitive Advantage

Transferring competencies, capabilities, and resource

strengths across borders contributes to

Development of broader competencies and capabilities

Achievement of dominating depth in some competitively

valuable area

Dominating depth in a competitively valuable capability

is a strong basis for sustainable competitive advantage

over

Other multinational or global competitors and

Small domestic competitors in host countries

Coordinating Cross-Border Activities to

Build a Global Competitive Advantage

Aligning activities located in different countries

contributes to competitive advantage in several ways

Choose where and how to challenge rivals

Shift production from one location to another to take

advantage of most favorable cost or trade conditions or

exchange rates

Use Internet technology to collect ideas for new

or improved products and to determine which

products should be standardized or customized

Enhance brand reputation by incorporating

same differentiating attributes in its

products in all markets where it competes

What Are Profit Sanctuaries?

Profit sanctuaries are country

markets where a firm

Has a strong, protected market

position and

Derives substantial profits

Generally, a firm’s most strategically

crucial profit sanctuary is its home market

Profit sanctuaries are a valuable

competitive asset in global industries!

Fig: Profit Sanctuary Potential of Various Competitive Approaches

What Is Cross-Market Subsidization?

Involves supporting competitive offensives in one market with

resources/profits diverted from operations in other markets

Competitive power of cross-market subsidization results from

a global firm’s ability to

Draw upon its resources and profits in other country markets

to mount an attack on single-market or one-country rivals and

Try to lure away their customers with

Lower prices

Discount promotions

Heavy advertising

Other offensive tactics

Global Strategic Offensives

1. Direct onslaught

Objective – Capture a major slice of market share, forcing rival to

retreat

Involves

Price cutting

Heavy expenditures on marketing, advertising, and promotion

Efforts to gain upper hand in one or more distribution channels

2. Contest

More subtle and focused than an onslaught

Focuses on a particular market segment

unsuited to defender’s capabilities and in

which attacker has a new next-generation product

3. Feint

Move designed to divert the defender’s attention away from

attacker’s main target

Three Options

Achieving Global

Competitiveness via Cooperation

Cooperative agreements / strategic alliances with foreign

companies are a means to

Enter a foreign market or

Strengthen a firm’s competitiveness

in world markets

Purpose of alliances

Joint research efforts

Technology-sharing

Joint use of production or distribution facilities

Marketing / promoting one another’s products

Benefits of Strategic Alliances

Gain scale economies in production

and/or marketing

Fill gaps in technical expertise

or knowledge of local markets

Share distribution facilities and dealer networks

Direct combined competitive energies toward defeating

mutual rivals

Take advantage of partner’s local market knowledge and

working relationships with key government officials in host

country

Useful way to gain agreement on important technical

standards

Pitfalls of Strategic Alliances

Different motives and conflicting objectives

Time consuming; slows decision-making

Language and cultural barriers

Mistrust when collaborating in

competitively sensitive areas

Clash of egos and company cultures

Becoming too dependent on another firm for essential

expertise over the long-term

Pick a good partner, one that shares

a common vision

Be sensitive to cultural differences

Recognize alliance must benefit both sides

Ensure both parties deliver on their

commitments in agreement

Structure decision-making process so actions can be

taken swiftly when needed

Manage the learning process, adjusting the alliance

agreement over time to fit new circumstances

Guidelines in Forming Strategic Alliances

Characteristics of Competing in Emerging Foreign Markets

Tailoring products for big, emerging markets often

involves

Making more than minor product changes and

Becoming more familiar with local cultures

Companies have to attract buyers wit

bargain prices as well as better products

Specially designed and/or specially

packaged products may be needed to

accommodate local market circumstances

Management team must usually consist

of a mix of expatriate and local managers

Strategies for Local Companies

in Emerging Markets

Optimal strategic approach hinges on

Whether a firm’s competitive

assets are suitable only for the

home market or can be

transferred abroad

Whether industry pressures to

move toward global competition

are strong or weak

Fig: Strategy Options for Local Companies in

Competing Against Global Challengers